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The top 10 banks in the UAE improved their profitability as return on equity (RoE) rose 1.3% quarter-on-quarter to 15.1% in the third quarter (Q3), a report said.
Meanwhile, return on assets (RoA) improved by 0.1% quarter-on-quarter to 1.7% quarter-on-quarter on stronger economic activity, higher interest rates and higher oil prices, according to the latest UAE Banking Pulse for Q3, published by leading global professional services firm Alvarez & Marsal (A&M) Company.
Profitability was boosted by higher core interest income despite slower loan and advances (L&A) growth. Overall NII surged 12.2% MoM and NIM improved 18 bps MoM, thanks to higher credit yields due to higher benchmark interest rates. Non-performing loans (NPL)/L&A fell 0.2% to 5.5% in the quarter, with asset quality improving.
L&A rose 0.7% QoQ, while deposits rose 5.2% QoQ. Overall, despite positive economic activity in GCC, 3Q22 rate hike had positive impact on banks but more modest impact on lending; IMF revises up UAE Oct 2022 GDP forecast from 4.2% to 5.1%.
In A&M’s UAE Bank Pulse analysis, the top 10 listed banks in the country are First Abu Dhabi Bank (FAB), Emirates National Bank (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB) , Mashreq Bank (Mashreq), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), National Bank of Ras Al Khaimah (RAK) and Sharjah Islamic Bank (SIB).
The key trends identified for the third quarter of 2022 are as follows:
1. Customer deposit growth led by FAB significantly outpaced L&A growth in 3Q22. FAB reported the highest QoQ increase in deposits at 15.1%, rising to AED746 billion in 3Q22. Total L&A grew 0.7% QoQ in 3Q22, while deposits at the top 10 banks rose 5.2% QoQ. As a result, the loan-to-deposit ratio (LDR) fell 3.5% MoM to 78.9%.
2. Operating income increased by 8.3% month-on-month, mainly driven by the increase of NII of UAE banks. NII surged 12.2% quarter-on-quarter. Other operating income rose 8.0% sequentially, offset by a 7.8% sequential decline in net fee and commission income. As a result, total non-interest income fell slightly by 0.1% quarter-on-quarter.
3. The return on assets exceeded the increase in financing costs, and the net interest margin expanded. Supported by a 7.4% QoQ rise in credit yields, consolidated NIM improved 18 bps QoQ to 2.5%. Most of the top 10 banks in the UAE have seen NIM expand. Cost of funds (CoF) increased 66bps QoQ to 1.9% in 3Q22 as interest expense increased +61.1% QoQ on the back of higher interest rates.
4. The operating cost efficiency of the UAE’s top 10 banks improved for the second consecutive quarter. The cost-to-income ratio (C/I) improved 1.0% QoQ to 30.5%. This was primarily attributable to an 8.3% sequential increase in operating income, which outpaced a 5.0% sequential increase in operating expenses.
5. Banks’ cost of risk (CoR) fell 19 bps qoq, the first time after six consecutive quarters. Reported provisions increased by 27.8% quarter-on-quarter. This was mainly due to a 27.8% QoQ increase in impairment charges to AED4.1 billion in 3Q22. Six in 10 banks reported higher impairment provisions due to higher risk costs.
6. RoE increased 1.3% QoQ to 15.1%, while RoA improved to 1.7% in 3Q22; attributable to a 7.3% QoQ increase in profitability.
Asad Ahmed, Managing Director and Head of Middle East Financial Services at A&M, commented: “UAE banks have seen improved profitability, driven by strong economic growth and rising interest rates. Accelerated by a recovery in asset quality. We expect the improving trend to continue in the fourth quarter, but remain cautious about the impact of higher rates on retail and corporate borrowers.”
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